The difficulties of financing a small business
The thought that alternatives available for medium-sized business owners fall to selections between traditional financing, factoring companies , or venture capital is the wrong way to examine funding small business efforts. Even when the business depends exclusively on debt financing to sustain its capital demands, business owners should examine the financing options readily available to them as a ‘portfolio’ of investment choices. See Freight Factoring Costs.
One size does not fit all– two or three sizes don’t fit all either.
The majority of the Main Street businesses we discuss here will sustain growth and fund working capital with borrowed money or cash flow. Thankfully, there are a number of options accessible. Regrettably, many small business owners look at the selections as an either/or choice to be made. I think it makes sense to look at financing alternatives that are appropriate to different scenarios and how they might work together to help small business owners find the capital they need.
For example, a good relationship with a community banker is very important to the long-term health of a small business. That’s not to say an SBA loan or other traditional loan is the very best and only solution to the financing demands of the local dry cleaner or restaurant. Yes, interest rates are lower on a traditional fixed-term loan, but how quickly a small business owner can get capital can be difficult with a term loan that takes weeks or months to fund if the small business owner really needs the cash now.
And, the elephant in the room is that many Main Street business owners don’t have the credit, time in business, or revenues to satisfy traditional loan criteria. This is even more so painful for early or idea-phase startups. No history, no product, and no revenues typically mean no loan.
For a business owner who doesn’t match the underwriting guidelines of a traditional lender, invoice factoring company products can serve to help establish credit while enabling the borrower to fill his or her short-term capital demands. Invoice Factoring Companies have less rigid lending requirements than does the local bank– but that comes with higher interest rates. Because of greater interest rates, small business owners should review repayment terms of a few months instead of a couple of years. Although factoring company financing can possibly be a highly effective tool when used properly, it can also be very costly if misused.
Many small business owners who do qualify for low-interest term loans still go to invoice factoring methods as a short-term bridge to a traditional term loan while they anticipate a traditional loan to become funded. If the business owner is trying to take advantage of an opportunity and can’t an SBA or other traditional loan to close, the additional interest they pay over the two or three months they wait is well worth almost immediate accessibility to capital offered by receivable factoring .
When checking out the many financing options readily available for small business owners, a number of the questions that should be asked include:.
1. What is the range of terms readily available?
2. Are there any upfront costs?
3. What is the minimum credit score needed in order to get the loan?
4. Precisely what are the underwriting guidelines in addition to my credit score?
5. How quickly can the loan be funded?
6. Will I require the cash now, or can I stand by?
7. Do I have the capacity to make regular and prompt payments?
A small business owner should manage his or her credit score like a precious asset. Sometimes short-term financial judgments have long-term repercussions. For instance; a business owner that had a very good business concept but no collateral, no income, and no credit was distressed and upset that lenders weren’t interested in his idea and weren’t gushing themselves to give him money. He wasn’t considering bootstrapping because it would cause him to downsize his growth plans. It wasn’t what he would like to hear, but bootstrapping his idea was the only real choice available and the approach I suggested. Many exceptionally successful companies were launched by an entrepreneur who bootstrapped his way to the top.
Precisely what’s the most effective technique for your Main Street business? There are certainly more than one or even a mix of many options– once size does not fit everything. Also see Freight Factoring Costs.